Greetings, welcome to the first virtual Village Farms International shareholders' meeting. At this time, all participants are in a listen-only mode. If you would like to ask a question during this presentation, please click on the Ask Question box on the left side of your screen. Type in your question and hit submit. Please note, this conference is being recorded. I will now turn the conference over to your host, John McLernon. Chairman, please go ahead.
Thank you very much. I also would like to welcome you all to our first virtual shareholders meeting of Village Farms International. My name is John McLernon. I'm chairman of the board of directors of the company, and I will chair the meeting. We hope all our shareholders and their families are safe and persevering in the current environment. We know it has created many hardships. On behalf of the board, I wish to express thanks to those shareholders who have submitted their proxies in advance. Only shareholders or their proxies are entitled to vote at this meeting. To make the best use of our time, certain shareholders have been asked to move and second the proposals which are called for in the notice of the meeting. The meeting will now come to order.
I shall ask Stephen Ruffini, the Chief Financial Officer of the company, to act as secretary of the meeting, and Jenny Karim of Computershare Investor Services Inc., the transfer agent and registrar of the company's common shares, to act as scrutineer. Notice calling the meeting was mailed to shareholders on or before May 25th, 2020. We have received confirmation from the company's transfer agent and registrar as to its mailings. I directed a copy of the notice, together with confirmation of mailing from Computershare, be kept with the records of this meeting. The scrutineer has confirmed that proxies representing approximately 58.92% of our outstanding common shares have been properly deposited prior to the meeting, and that a quorum is present. I therefore propose to proceed with the business of the meeting.
I've been advised by the scrutineer that all shareholders and proxy holders who wish to cast votes at today's meeting have done so in advance of this meeting. I'll take a moment to ask any registered holders to appoint a proxy holders who want to cast an online vote to do so now. We will leave the polls open for one minute for registered holders and proxy holders who have properly logged in with their control numbers and wish to vote. I declare that the meeting is regularly called and properly constituted for the transaction of business. I shall now request the secretary to table the minutes of the annual meeting of the shareholders of Village Farms International held on June 25th, 2019. The next item of business is the presentation of the consolidated financial statements of Village Farms International Inc.
and its subsidiaries as at December 31st, 2019, and the independent auditors' report thereon. I will now ask Stephen C. Ruffini, the Chief Financial Officer of the company, to table the consolidated financial statements of the company and its subsidiaries as at December 31st, 2019, and the auditors' report thereon. A copy of the consolidated financial statements of the company and its subsidiaries as of December 31st, 2019, and the independent auditors' report thereon, together with the related Form 10-K, has been mailed to the requesting shareholders and are available on the company's website as well as EDGAR and SEDAR. We'll now proceed with the election of the directors of the company. Before we proceed, I would like to thank Dr. Roberta Cook for her services to Village Farms. She has been an integral member of the Village Farms board since January 2016.
Roberta brought a whole dimension of thoroughness and inquisitiveness, backed by her experience in produce and her focus on detail. Thank you, Roberta. You will be missed. Six directors of the company are to be elected to hold office until the next annual meeting of shareholders, or until his or her successor is elected or appointed, and information regarding the nominees proposed by management is set out in the information circular which accompanied the notice of the meeting sent to shareholders. Mr. Ruffini?
Mr. Chair, I have the pleasure of nominating the following persons for election as directors of the company to hold office until the next annual meeting of shareholders, or until their successors are elected or appointed. Michael A. DeGiglio, John P. Henry, John R. McLernon, Christopher C. Woodward, David Holewinski, and Stephen Ruffini.
I second the motion, Chair.
Thank you. The company's bylaws require that nominations of directors by shareholders be received by the board of directors of the company in prescribed manner in advance of this meeting in order to be valid. As no nominations were received from shareholders prior to the deadline, I declare that the nominations for directors are closed. You have heard the motion. Based on the vote received, the motion is carried. As there are six nominees and six positions on the board, I now declare that Michael A. DeGiglio, John P. Henry, John R. McLernon, Christopher C. Woodward, David Holewinski, and Stephen Ruffini have been elected by acclamation as directors of the company to hold office until the next annual meeting of shareholders, or until their successors are elected or appointed.
As described in the management information circular, the Board has adopted a majority voting policy that will apply if any of the Directors receive a number of four votes that is less than a majority of the votes cast. We will now proceed with the appointment of the auditors and the authorization of the Board of Directors of the company to fix their remuneration. I believe John Henry has a motion in this respect.
Stephen
Stephen Ruffini. Yeah.
I move that PricewaterhouseCoopers be appointed auditors of the company to hold office until the next annual meeting of shareholders, and that the board of directors of the company be authorized to fix the auditors' remuneration.
I second the motion, Chair.
You have heard the motion. Based on the vote received, the motion is carried. Our last order of official business is to ratify the amendment to the company's bylaws to increase the quorum for any shareholder meeting to two persons present who represent not less than 33.3% of the outstanding shares of the company entitled to vote. Is there a mover?
I move that the amendment to the company's bylaws be ratified.
I second the motion.
You have heard the motion, and based on the votes cast, the motion is carried. I now declare the official portion of the meeting terminated. I'll now turn it over to management to provide a business update, which you can view on your screen. You can ask questions during today's presentation. Due to time constraints, management will answer certain questions during today's presentation and may address some questions directly with shareholders after today's presentation. Mike, I turn it over to you.
Thank you, John. Let's just go to slide seven. There's a cautionary statement, of course, that everyone can read on their own. We're moving along here today, but I'd like to cover some important successes that we, as management and the board, have seen in 2019, which was quite an important year in the transformation of Village Farms from one of North America's largest, longest operating and most successful vertically integrated greenhouse produce suppliers, to our vision of becoming a highly profitable plant-based consumer packaged goods company. To do this by leveraging our three decades of experience in unmatched greenhouse assets for new, high-value opportunities, both domestically and internationally. We are well on our way. In doing so, we're proceeding with the same fundamentals we have always had in guidance of our company. Commitment to being good stewards of investor capital.
Management's interests remain very aligned with our shareholders. I remain the largest shareholder, with nearly 17% of the shares outstanding, and management and the board are just at 20%. One of the lowest share counts, cumulative share counts, among any of our Canadian cannabis peers. We have been very prudent around our capital raises and equity raises, and have done so for solely growth opportunities that we have been confident will be accretive to our shareholders. We have no warrants. We have had no warrants issued in any of our raises and our capital raises, and currently none outstanding. Always focused on cash flow generation and profitability. Finally, let me take a moment to discuss return on invested capital.
It's a metric that's rarely talked about in the cannabis industry because instead, week after week, we hear about overinvestment, facility closures or multiple facility closures, downsizing, asset sales, write-offs, management departures, executive management retiring prematurely, restructuring, write-down of inventories, and the list goes on and on. At Village Farms, return on invested capital is the core of every investment we make, and that has made one of the many clear differences within the industry. Pure Sunfarms is now the premier producer and supplier of cannabis products in Canada. Our first step in realizing our vision was entry into the Canadian cannabis market, where in less than three years, we have built Canada's premier producer and supplier of quality cannabis products, which I'll explain more. Our strategy has been one that has differentiated us and has been a key driver in our industry-leading performance.
We pursued the Canadian cannabis opportunity with a very different strategy.
By leveraging 30 years of our large-scale, low-cost, vertically integrated growing experience for us, cannabis was just another crop, but a much more profitable crop. One of the first to pursue a greenhouse strategy in the industry, and one of the first to look at conversion of existing assets, which has led us to being able to perform quicker than anyone else in having a 20-year history and 20-year operating company of existing growers and human assets, that has made a clear difference. On top of having far less capital requirements, and not starting from zero. In the end, we've learned from our experience that you cannot buy this experience we have. You have to build it, and we have done that over decades. Great agriculture brands have built on exceptional growing operations. First and foremost, we focused on getting this right.
We hired what we believe is the best management team in the business, led by our CEO, Mandesh Dosanjh. His background has been phenomenal in operations and consumer products, and most recent, prior to coming on board with Pure Sunfarms, heading up the Ontario LCBO and then being one of the initial executives putting forth the cannabis strategy for the Ontario Board. Pure Sunfarms has set the standard in Canada, and I'm publicly congratulating Mandesh and his entire team on their success today in setting the standard in Canada. 2019, we ramped up the Delta 3 facility to full production in an incredibly short period of time and commenced cultivation while construction was actually still underway and rapidly became one of the largest producers in the country, the lowest cost producer among its publicly traded Canadian peers.
May I say that being a low-cost producer is clearly the most prudent thing you can do in agriculture. We've learned that in 30 years of doing it. We have a leading EBITDA margin within the space. One of the very few profitable Canadian LPs, profitable every quarter since just the second quarter of production, five consecutive quarters in a row. We generated CAD 54 million worth of EBITDA in our first full year of operations. Majority of 2019 sales, 93%, were on a wholesale basis to other licensed producers while we waited for Health Canada approval to sell directly to provincial boards and retailers. In that first year, generating CAD 54 million, 93% of our sales were to wholesale, not retail. Wholesale was profitable during the period where there were short supply and spot pricing in 2019.
Once we received approval to sell directly to provinces and launched the Pure Sun brand and its first products, we really started to move in the fourth quarter of 2019. We had the advantage of watching the market develop, along with the best management team in the business. Our world-renowned BC Bud, best climate of any in all of Canada. We always knew we didn't need to be first to be best. We were able to quickly produce safe and a high-quality product that consumers wanted at an attractive price. Our brand is resonating very well with consumers. We have only been selling to retail markets since the end of September last year, just nine months, and Pure Sunfarms has now become the top-selling brand of dried flower with the Ontario Cannabis Store immediately out of the gate. Number one market share in the first three months.
Number one market share in the first quarter of 2020 this year. Number one market share in the year to date 2020. Regularly have the number one dried flower product, and actually, we hit 20% market share in April. Now, that's not to say we'll do that consistently every month, but with our corporate goal of having eventually 20% of the Canadian market share, it was clearly nice to see that in one month over the last six months. We took the view from the outset that we're not just competing against other suppliers, but we're competing against the illicit market. The illicit market still represents the vast majority of total cannabis sales in Canada. Ontario alone estimates that its fiscal year ending March 2020, this first quarter of this year, more than 81% of cannabis sales in the province took place from the illicit market.
We were able to meet our consumer demands in terms of the attributes we provided. Great quality and, coupled with price, very competitive pricing was our key to taking market share and the ability to do this and be profitable due to our low cost of production. Our continuous focus on low cost and enhancing quality has resonated well, and now we just concluded one of the largest and most advanced processing areas in all of the industry, which will allow us to start rolling out additional new products. Moving on, we have multiple growth drivers to drive our retail sales, and despite all this progress and success, Pure Sunfarms is just getting started. The industry is going through some growing pains, but Canada is still a massive market. Current run rate of more than CAD 2 billion in annual sales, estimated to be CAD 6 billion in 2025.
Importantly, Pure Sunfarms has only been selling into the retail market for nine months. B.C. alone is estimated to be CAD 1 billion on its own as a single province by 2025, and by far, we are the leading supplier in British Columbia. Numerous catalysts near-term and long-term to drive this continued growth, such as our ability to launch in additional provinces. We just added two more on top of British Columbia and Alberta and Ontario, and that's just happened in five months. We just started, as I said, shipments to Saskatchewan and will soon to Manitoba. Combined, these five provinces represent 70% of the Canadian population, and we are continuing to seek distribution in other provinces as we speak. Expansion in the number of retail stores, particularly in Ontario, is underway.
As of the end of last year, Ontario had just 50 stores. That number is now close to 90. Still well below the 430 stores in Alberta. Gaining traction. On a per capita basis, Ontario has just a small fraction of retail store network that Alberta has. This is important as pre-COVID activity, approximately more than 80% of sales in Ontario were via retail stores. Momentum in new stores opening in Ontario will bode well for Pure Sunfarms with its leading market share as it introduces new products as we speak. The other significant growth drivers are new product introductions. To date, we have been in the market with dried cannabis products. We recently launched our pre-rolls. In its 2019-20 fiscal year, pre-rolls were the second-largest product category in Ontario.
We'll launch our first Cannabis 2.0 products this summer, and we'll be starting with pre-filled 510 vape cartridges available in the extract form of its top-selling dried cannabis strains that Pure Sunfarms has. We're confident that consumers will respond, especially as we roll out a price point that we believe will be favorable. A reduction in number of suppliers. Clearly, we see too many suppliers that are currently in the industry, and we believe that will change. It is our belief that the Canadian cannabis industry will eventually look more like the Canadian beer industry, where a handful of major suppliers will have the vast majority of market share, and we plan to be part of that. We're continuing to take share from the illicit market. It is estimated that the illicit market still comprises more than 80% of Canadian cannabis sales. Price is a key driver.
You have to have great quality, safe product. You have to have the correct potency and the attributes that consumers want, but it has to be at a competitive price. We are shining in that specific area versus the competition. We are aligned with the province's own philosophies around the black market, in Ontario's example. Produce business, talk about that as a platform of new high-value crops. Village Farms continues to be one of the largest and most successful suppliers of greenhouse-grown produce in North America. Every day, we deliver millions of pounds of tomatoes, cucumbers, and peppers to the vast majority of major retail grocers and big box retailers throughout the U.S. and Canada. 2019 was especially challenging year for the produce business.
We had operational challenges. We continued the transition of capacity displaced by our cannabis assets into new relationships with other third-party growers, both in Mexico and in Canada. We have now replaced that capacity that was displaced and then some, making progress towards our goal to return the business to positive EBITDA this year. Platform for new high-value, high-growth opportunities in CBD and potentially federally legalized high-THC cannabis in the USA. Greenhouse operations we have are among the very largest and very best located in the United States. We have more than CAD 300 million in replacement value in our U.S. assets alone, and none of our publicly traded Canadian peers can say that. Many of them have communicated that they're focused on the U.S. for the future, and we're ready to go right now. Our hemp CBD, it still remains a very significant opportunity for Village Farms.
We're excited and remain so. We were very excited when the federal government legalized hemp production and CBD products in December 2018. We put hemp and CBD strategy into high gear with our Village Fields Hemp company for outdoor cultivation, started conversion of a portion of our Texas greenhouses for hemp production. We had an outstanding first year of outdoor grow, exceeding expectations for yield and quantity. We learned a lot. However, federal government's very own agencies, the FDA, failed to provide the regulatory clarity to enable law-abiding companies to participate and help this huge opportunity realize its potential. The industry has essentially come to a standstill pending FDA providing a clear path forward. Leaders in the space are struggling or falling. There are bankruptcies. Large retail players have put their CBD plans on hold. There's a huge economic impact.
We aren't going to put our shareholders in harm's way during this period of regulatory uncertainty. CBD is a huge long-term opportunity, and there's no need for us to take undue risk that's happening in the industry and with many other companies today. We're exploring additional paths forward in the meantime that we can act on prudently in the nearer term. Actively engaged in market research and looking at product development that would allow us to move forward within the current regulatory environment as well. Momentum towards federally legalized cannabis in the U.S.A. We are increasingly optimistic about the prospects of federal legalization of cannabis in the U.S.A. Pre-COVID, already momentum towards legalization. Now legal at the state level in some two-thirds of the states in the U.S.A., with that number expected to increase quickly. This increasing acceptance and increasing consumption, we believe, will drive legalization in the future.
Pandemic recovery. The country needs economic and employment stimulus. Governments will need new sources of tax revenue. U.S. has a history of major regulatory change to fuel economic recovery. An example is the Depression and the end of Prohibition. We think there'll be a duplication of that in the future. We are increasingly seeing a number of Canadian LPs looking south with this in mind and talking it up. We believe there's no better-positioned company to capitalize a federally legalized cannabis market in the USA other than Village Farms. With 5.7 million sq ft of high-tech greenhouse in, without a doubt, the best growing climate for cannabis in the USA, invaluable experience of having already built a premier cannabis business in Canada based on the fundamentals and the experience of Village Farms, which we'll duplicate here in the USA as well.
Moving forward, we are poised to deliver meaningful shareholder value. Despite all of this achievement, all of these accomplishments, all of this progress, I truly believe the best is yet to come. We have only just begun to realize the value of our opportunities. Pure Sunfarms, Canada's premier cannabis company, is just getting started. We'll leverage its low-cost, high-quality capabilities and leading brand via multiple growth drivers near-term and long-term. Importantly, Pure Sunfarms also has proven out Village Farms' own capabilities to capitalize on these high-tech value in our vertically integrated agriculture opportunities in the U.S. Our produce business provides an unmatched platform for those opportunities, including our relationship with a vast amount of retailers in the USA. We're now actively looking to leverage what we have accomplished in Canada through surgical opportunities internationally.
As a reminder, in just over a year, Pure Sunfarms' option on the Village Farms-owned Delta 1 facility expires. Delta 1 is more than double the size of Delta 2 and 3, combined at 2.6 million square feet. If Pure Sunfarms chooses not to exercise that option, Village Farms will look forward to move quickly to capitalizing that opportunity independently. CBD is a huge opportunity for our company, we are off to a great start. We have the people, the capabilities, and the infrastructure. The regulatory clarity will come, we will be ready. In the meantime, we are moving on these opportunities we can address in the current environment. Finally, we stand at the ready to pursue what would be the largest opportunity in the history of our company if and when cannabis is federally legalized in the U.S.
All of this positions Village Farms very well to deliver meaningful shareholder value for the short and long term. Importantly, as we proceed, your management team and your board of directors does so firmly aligned with you, our shareholders, as in aggregate, we continue to own just under 20% outstanding of Village Farms shares. Thank you for listening, and with that, we'll take any questions from the audience. Operator?
I still have that question. This is Steve Ruffini. We have a few questions. Just give us a second to read them and then we'll address them. First question from a shareholder, "Are any conversion costs of Delta 2 included in Pure Sunfarms' income and expense statements?" The conversion costs of Delta 2 to date are certainly on the balance sheet of Pure Sunfarms, not on the income statement, but they're on the balance sheet. The west side of that facility is complete. Not fully licensed yet, but it is complete, and it has been paid for. The east side will get completed either later in 2020 or 2021 as we have better visibility on demand. Second question. Mike, I'll read the question. You want to handle it?
Sure.
The question is, "When will Village Farms' profitability achieve consistency to allow for dividends?" Mike?
Well, I think long term, we'd like to think we could be a dividend-paying company. In the short term, we want to reinvest our capital and continue to be a growth company. We see great opportunities, not just domestically, as I mentioned, but internationally. Our goal short term would be reinvestment of as much as we can to continue to grow the company.
Next question. One of our shareholders would like us to address, provide an update on CBD. Says there's a large amount of harvest last fall in North Carolina, South Carolina, Tennessee, et cetera. No results have been reported. We ourselves have experienced. We had a very successful harvest. We've had minimal sales. We continue to get inquiries to purchase that product. We've sent a number of COAs to potential buyers. As yet, we've had small sales, but no material sales. As Mike alluded to in the earlier presentation, unfortunately the FDA has put the kibosh on CBD, and everyone is struggling to move the hemp biomass, which essentially was grown for the CBD content. Ours has a very good quality hemp, but just have not found the right opportunity yet. Hopefully, we'll have something positive to report this summer with our 2019 crop.
We did not plan out any outdoor hemp with any of those farmers in 2020. Although we have a license to grow hemp at one of our Texas facilities, we were one of the first to get it, we have not commenced the production of greenhouse-grown hemp in Texas either. With the greenhouse, there's a lot more flexibility if the FDA does come down from the mountaintop and give us some Well, give CBD an opportunity to thrive, then we can begin immediately growing that in our greenhouse in West Texas. At this stage, there's no sense growing if there are no customers. Next question. Now the dispute over Pure Sunfarms has been resolved, are Village Farms and Emerald rowing in the same direction?
Well, I'll answer that. Village Farms has always been 100% aligned with Pure Sunfarms, both in strategy, in growing, and brand. We have not wavered on that whatsoever. I cannot speak to Emerald at all as to which direction they're heading.
Next question. When will the veggie side be profitable?
Well, as I've always mentioned, the produce side in the U.S. is always going to be under commodity pressure because of NAFTA. Our biggest problem in competing as an industry is competing in Mexico, where once again, I've mentioned this many times, labor is at CAD 6 a day while we're at CAD 20 an hour, both in Canada and the U.S., more or less. There will always be that cost structure. We are investing more on greater efficiency, and I think the future bodes well for looking at technologies that come in to help to reduce our overall costs. As you know, we're always looking to lower our costs. Pricing has actually been much better this year, and I think we will start to show much improvement this year over last year and heading in that direction.
Hopefully we can be there in a very good position at the end of this year, going into next year.
The last current question. Also, do you have plans to raise money soon? With respect to all our prior raises, they've all been, as Mike said in his statement, that we've raised money in the past for our growth initiatives. If there's a growth initiative that our current cash balance can't fund, yes, we would look to raise capital as we've done over the last three years. At this moment in time, Village Farms produce business and the Pure Sunfarms cannabis business are not in need of any funds. There'll be no need for us to raise money for our existing operations.
Yeah. Our existing operations are.
Yeah
fine and independent. It's only if there's accretive opportunities in the future.
With that, operator, I think that's all the questions.
This does conclude today's conference, and you may disconnect at this time. Thank you for your participation.
Thank you.
See you later.